Hannes Takacs: FDI can definitively be a positive contributor to the socio-economic progress

Mongolian Economy spoke with Hannes Takacs, Resident Representative of the European Bank for Reconstruction and Development in Mongolia.  

-Let’s start with the European Bank for Reconstruction and Development (EBRD) in Mongolia. How many projects and programs is the EBRD currently implementing in Mongolia? What is the total amount of loans and investments in Mongolia?

-Mongolia became an EBRD country of operations in 2006, so a little bit more than 15 years ago. Since that time, the EBRD has been supporting Mongolia in its transition to a full market economy and is currently the largest private sector investor in the country with the majority of financing provided to companies and small- and medium-sized companies in the non-mining sector. Almost all of these projects involve local entrepreneurs or banks. Recently, projects that we are supporting cover also the development of the vital infrastructure, such as transport links, district heating networks, irrigation and flood protection, waste management as well as electricity related infrastructure just to name a few.

To date, the EBRD has invested more than USD 2.11 billion in Mongolia’s economy through 121 projects.

Ninety-three per cent of the cumulative Bank’s financing was extended to private companies. 

-In addition to mining, the EBRD has implemented a number of projects to diversify the economy and support the private sector. Can you inform our readers about the results and significance of some major projects and programs?

-After providing its first loan to XacBank in 2006, the EBRD significantly expanded its work with local financial institutions such as Khan Bank, XacBank, including its subsidiary XacLeasing, and Transcapital through its Trade Facilitation Programme, small and medium-sized enterprise (SME) and energy efficiency lending facilities and risk-sharing schemes. To date, almost 190,000 loans worth more than US$ 535 million of EBRD funds have been provided to local micro and small businesses.

In early 2021 the EBRD and the Bank of Mongolia set up a long-term dollar-tugrug (MNT) swap facility to increase the availability of local currency financing to Mongolian businesses affected by the coronavirus pandemic. The swap helped the EBRD secure reliable access to MNT liquidity and to provide local currency loans both directly and through local banks to companies in such sectors as agribusiness, building materials, light manufacturing and services, as well as to SMEs, which employ over 40 per cent of the country’s population.

A lot has been done to promote sustainable infrastructure and green municipal solutions, both in the country’s capital Ulaanbaatar and beyond. The city, with a population of 1.4 million, became the first municipality in Asia to join the EBRD’s Green Cities programme and is now addressing environmental and infrastructure challenges. For example, as part of the Ulaanbaatar Green City Action Plan, the city is improving its waste management system. This work is supported by the Republic of Korea and the European Union (EU).

A major step towards improved regional integration and international trade between Mongolia, China and Russia is the extension of the 202-km road between Mongolia’s capital and Darkhan, the third-largest city in Mongolia and 100 km south of the border with Russia.

The promotion of renewable energy is another area where the Bank has been active in Mongolia. The EBRD has financially supported the construction of the Sainshand, Salkhit and Tsogttsetsii wind farms. These facilities are today helping to reduce the country’s carbon emissions and provide a better energy mix.

The Bank’s efforts to support non-extractive industries in Mongolia gave a major boost to local agribusiness producers such as the juice manufacturer Vitafit, beverage producers APU and MCS, the food producer Teso Group and the country’s leading dairy company Suu Milk. With the help of the EBRD, Suu Milk is renewing its transport fleet, serving more than 2,500 nomadic herders across Mongolia.

For 15 years the Bank has also been supporting the country’s traditional industries such as the production of cashmere with loans to the local manufacturers such as Gobi Cashmere. The cashmere sector is one of Mongolia’s key industries; the country is the largest supplier of cashmere wool in the world, accounting for 30 per cent of global production.

The EBRD funds have also helped to develop other modern production facilities for clients such as Mongolia’s leading pharmaceutical conglomerate Monos Group and the leading local logistics company Terra Express.

Almost 600 micro, small and medium-sized enterprises in Mongolia, including those in remote rural areas, have participated in various advisory projects supported by the EU and implemented by the EBRD. More than half of them are women-led businesses. These projects have helped create almost 5,000 new jobs, increased their efficiency and productivity and widened product range.

–As an international financial institution that works closely with the Mongolian private sector, how do you assess the business environment and private sector development in our country?

-For the private sector development in Mongolia, it will be important to create an enabling legal and regulatory business environment for enhanced private sector participation in the economy. It must be the goal of the government to foster the private sector’s role as an engine of economic growth, with the government acting as regulator, enabler and catalyst for economic activities. 

Currently, there is a sizeable footprint of state-owned enterprises (SOEs) in the country. Sometimes in areas where the private sector companies may be more efficient. Therefore, it is important to create a level playing field for public and private companies to ensure competitive neutrality as many SOEs still enjoy a range of protection and benefits, such as support measures, guarantees, and subsidies. This leads in many cases to a stronger competitive position of public companies compared to the private ones. Where private companies are better placed to deliver goods and services, clear priority should be given to them. 

Generally, we see a lot of engagement by the private sector and quite a number of strong companies with a good business outlook and a promising start-up scene even though on a small scale. Most of such companies are small- and medium-sized enterprises, a segment where the EBRD provides a lot of support as well as financing instruments. It has to be recognised that SMEs, specifically in the non-mining sectors, provide most of employment, are less capital intensive and have a good potential for export. Additionally, they also create jobs in urban but more importantly in rural areas. For Mongolia’s sustainable growth, it will be important to support SME development and the diversification of the economy away from the mining sector.

Accordingly, this is reflected in the government’s long-term development strategy Vision 2050. The state SME Agency, which also receives technical assistance from the EBRD, will play an important role in this process.

Since 2006, when we started our activities in Mongolia, the EBRD has been supporting private sector companies in their development and we see ourselves as their long-term partner as proven in many occasions. The combination of advisory services and financing available from the same source provides a unique opportunity for corporates and SMEs to grow and prosper, thereby creating jobs for the future. 

-Mongolia’s foreign direct investment (FDI) has declined sharply in recent years due to unfavorable treatment of foreign investors. What do you think we need to focus on in order to send a positive signal to foreign investors and bring them back to Mongolia? Recently, our country has been paying a lot of attention to reforming the investment climate. What legal and governance reforms do you think need to be made? What are the common barriers and challenges you face in observing EBRD projects?

-Generally, it has to be widely understood that a positive investment climate and its perception by all stakeholders, foreign as well as domestic, is one of the key success factors in the development of an emerging economy and society. Creating an enabling investment environment, a proper legal framework and improving public awareness of how foreign direct investments (FDI) can contribute to the job creation, poverty reduction and wealth growth for the people of Mongolia will be essential to succeed. FDI can definitively be a positive contributor to the socio-economic progress.

Reforms initiated, planned and implemented by the government, the resolution of the Oyu Tolgoi case with Rio Tinto and a numbers of initiatives aimed the improvement of the investment climate, can create a window of opportunity to attract FDI even during current  globally macro-economic challenges. There is clearly a need for a long-term stability and predictability of the investment climate as well as  clear understanding that countries are competing for investments. In a globally competitive FDI environment, Mongolia needs to show why it is an attractive destination for investors. The investment climate must be stabile and predictable, so foreign as well as domestic investors can make long-term investment plans. The stability and risk reduction are generally more important for investors than the opportunity for high short-term returns. This is also reflected in various FDI position papers and during policy dialogue consultations conducted, for example, by the international business chambers active in Mongolia, such as the EuroChamber Mongolia.

Another important factor for attracting and maintaining FDI is the existing and planned connectivity, logistics and the availability of general infrastructure as a basis for the sustainable economic growth as well as the availability of skilled workforce. 

Concerning necessary legal and regulatory reforms, the new investment law, currently under the preparation, will be a very important milestone and it is good to see that stakeholder consultations already started. The implementation of other legal acts and initiatives, such as, the revision of the bankruptcy law, the out-of-court settlement regime and strengthening of the enforcement agencies, to name a few, will be required. 

Additionally, we recommend the establishment of a fully operational Foreign Investment Council in line with the existing international standards as key platform for the public-private dialogue and the attraction of investment to Mongolia. The EBRD stands ready to support such an initiative and is already discussing it with the relevant authorities.

-What types of financing products is the EBRD interested in offering in the future?

-The EBRD activity in Mongolia is based around the Bank’s country strategy approved in 2017. In Mongolia the EBRD is helping to promote the country’s resilience by supporting the non-extractive sectors of the economy, providing better access to finance and improving energy supply. Furthermore, to ensure sustainable growth, we support the financial sector through small and medium-sized enterprise (SME) loan facilities, equity and technical assistance. The EBRD is also working on the sustainability of infrastructure services through greater efficiency, commercialisation and green technologies. 

One of our flagship products is the Women-in-Business Programme, which was successfully rolled-out in Mongolia with our partner-banks and selected non-bank financial institutions. The Programme does not only cover improved access to finance it also includes policy dialogue to ensure a proper business environment for women entrepreneurs as well as targeted advisory services for women owned or managed companies.

Another important financing product is the Green Economy Financing Facility (GEFF), which is offered in Mongolia. The EBRD Green Economy Financing Facilities are innovative lines of finance available through local financial institutions, such as banks and leasing companies, for on-lending to eligible green projects. Already back in 2004, the EBRD started offering energy efficiency credit lines to local banks. In combination with advisory services, the model allowed the EBRD to reach out to a broad network of smaller financing opportunities, helping households and businesses to be more competitive and improve the quality of life.

It is also clear that we will continue supporting diversification of the economy by providing direct financing to corporates and SMEs in the non-extractive sector, including agribusiness, tourism and manufacturing, with a particular focus on enhancing exports and strengthening value chains through dedicated financial and advisory products. 

In case of export financing, the EBRD is rolling out its Trade Facilitation Programme (TFP) together with our Mongolian partner-banks Khan Bank and XacBank. In general, the TFP strengthens the ability of our partner-banks to provide trade financing, and through these banks gives entrepreneurs in Mongolia the support they need to increase their access to the import and export trade. The programme has played a major role in the EBRD’s efforts to help its partners and clients respond to and recover from the impact of the coronavirus pandemic. Furthermore, as importers and exporters grapple with increasingly complex supply routes, there has been a rapid rise in demand for trade finance that is vital to keeping the channels of trade open.

It is worth mentioning that we have a dedicated advisory team for small businesses located in Mongolia. Its activity complements our financing products and supports SMEs in their development and growth efforts. 

In December 2021 together with the European Union we started a new programme “Building Crisis Resilient MSMEs in Mongolia – post Covid -19”. It builds on the experience and lessons learnt from our work with macro-, small- and medium-sized businesses (MSMEs) and adjusted to respond to the current challenges faced by smaller companies in the country. In particular, it aims to mitigate the impact of the Covid-19 by enhancing the capacity of  MSMEs to withstand and recover from the economic fallout of the pandemic. The European Union has provided € 11 million to support the Programme through 2027.

Last but not least, we are in the process of defining the EBRD’s new five-year country strategy (2022-2027) for Mongolia. It will include , among other things, special programmes for youth in business, start-ups, working capital facilities and supply chain financing. It will also be offering financial products that will support Mongolia’s sustainable development, digitalisation efforts and, most importantly, the country’s successful green economic transition.

-FDI is becoming more valuable and important at a time when the economic crisis caused by the Covid-19 epidemic is having a negative impact on businesses and the state budget. Given the specifics of our country’s economy, in what areas do you think we should focus on attracting foreign investment in the near future and overcome this crisis?

-After the Covid-19 pandemic, which has had a major impact on the national economy, Central Asian economies as well as Mongolia are experiencing another negative impact based on the Russian war in Ukraine and its effect on economic linkages and the disruption of supply chains. Supply chain disruptions are already affecting the region but are particularly acute for countries with the highest share of transit trade through Russia such as Mongolia. This leads to macro-economic challenges affecting investments. Hence, highlighting the long-term investment and business opportunities in Mongolia to a wider audience will become even more important than before, requiring an active outreach to potential investors. In addition to mining, sectors which have a good chance to succeed in the long-term are renewable energy, agriculture, manufacturing and processing, IT and communication as well as the hospitality/tourism sector. There are moreover good opportunities for Mongolian companies to step in as regional supplier of good and services, specifically in Central Asian countries, based on disrupted international supply chains.